Key US indices saw a strong rebound on Friday, with the Dow Jones Industrial Average (DJI) nearing correction territory, just a small decline of 10% from its peak. The US economy may face a recession, as suggested by historical theories from the index’s founder.
The Dow Jones Transportation Average (DJTA) has decreased nearly 20% since its peak in late November, contributing to a bearish ‘death cross’ signal. This occurs when the 50-day moving average falls below the 200-day average, indicating market weakness.
Market Recovery Potential
Current oversold conditions imply a potential for a market recovery, but the timeline for this rebound will depend on monetary policy and forthcoming data. Last week, the DJI reached an RSI level of 25, often associated with potential reversals.
Market responses during the upcoming FOMC meeting will be key. If the Federal Reserve signals a softer approach and hints at rate cuts, buying momentum may increase, potentially pushing the index above 45,000.
However, risks remain substantial. Since Donald Trump’s election, the Fed’s tightening strategy has intensified under inflationary pressures. Rising inflation expectations reported by the University of Michigan also complicate the outlook.
Unstable Market Conditions
Presently, market consolidation appears fragile. Without support from the Federal Reserve, a significant sell-off could trigger margin calls, potentially driving the index down to 36,000.
Friday’s bounce-back in major US indices gives traders some relief, but there’s more at play here than just a one-day rally. With the Dow Jones Industrial Average approaching a 10% drop from its previous peak, some might see a possible bottom forming. However, history suggests this could be a warning of deeper troubles ahead. The index’s founder believed that transportation stocks often serve as a leading signal for the broader economy, which makes the sharp decline in the Dow Jones Transportation Average particularly relevant.
The nearly 20% drop in transport stocks since late November isn’t just a number—it’s confirmation of a ‘death cross,’ a term many traders associate with worsening sentiment. The 50-day moving average slipping below the 200-day one has been a textbook setup for extended sell-offs in the past. It signals that momentum has not only slowed but may be shifting decisively downward. If that pattern holds, rallies are likely to face resistance.
Right now, technical indicators suggest markets are oversold, increasing the likelihood of a recovery. The recent drop pushed the relative strength index (RSI) on the Dow to 25, a level that often coincides with short-term bounces. That said, oversold conditions alone are not a reason to expect sustained gains. Whether this turns into something longer-lasting will depend largely on monetary policy and upcoming economic data.
Attention now turns to the Federal Open Market Committee’s next move. In our experience, traders should focus not only on what the committee decides, but also on the tone policymakers adopt. If officials signal a shift towards cutting interest rates, buying pressure may build. A close above 45,000 would imply that confidence is returning. However, if the statement keeps the door open for further tightening, any rallies could be short-lived.
Monetary conditions remain tight, and risks tied to inflation are complicating matters. Since Trump’s election, the Federal Reserve has taken a more aggressive stance on curbing inflation, only intensifying that strategy as price pressures persisted. Recent data from the University of Michigan suggests inflation expectations are becoming more entrenched, which limits the central bank’s ability to loosen policy without consequences.
At present, the broader market setup appears unstable. Without a shift in stance from policymakers or clear signals of economic resilience, any downdrafts in price could lead to forced selling. If enough traders lose confidence, liquidity-driven moves could take hold, with stops triggering a cascade lower. Should that scenario play out, 36,000 becomes a realistic downside target in the near term.
